Ask a tax advisor on the topic of Severance pay

Severance pay + Business start-up

December 10, 2009 | 40,00 EUR | answered by Matthias Wander

I have been working for a large company for several years and I want to sign a termination agreement with a severance payment at the end of 2010 (beginning of 2011). (I am a business graduate, unmarried, no children). In 2011, I plan to establish a company in the form of a corporation (UG or GmbH), and I will be the managing director.

Annual gross income in 2009: about 48,000 euros;
Annual gross income in 2010 (estimated): about 28,000 euros (reduced to part-time due to further education).

Severance payment (2011): about 35,000 euros;
Founder's grant (2011): about 13,000 euros;

To maximize the tax advantage of my severance payment, I would not pay myself a director's salary in the first year. Based on the fifth rule, I have calculated that the severance payment should be tax-free in this case.

Additionally, I will likely receive a founder's grant from the Federal Employment Agency. As a result, my income would increase to about 48,000 euros (35,000 euros + 13,000 euros).

My questions:
1) Is my severance payment really tax-free if it is my only income in 2011?
2) Is it sufficient for the severance payment to be paid out in 2011, or does an employment contract need to exist until 2011 to trigger taxation in 2011?
3) Can the corporation generate profits while not paying a director's salary?
4) What will be the tax burden if I receive the founder's grant from the Federal Employment Agency?
5) How can I prevent my employer from transferring too much tax advance payment for the severance payment to the tax office? How can I quickly access the money again?

Matthias Wander

Dear inquirer,

Thank you for your inquiry, which I would like to answer based on the information provided in an initial consultation.

1. If the severance payment of €35,000 is the only income for the entire year, no income tax will be payable.

2. The severance payment is taxed in the year in which the employment relationship ends under civil law. If the employment relationship ends in 2011 and the severance payment is made in 2011, the taxation will occur in 2011.

3. Yes, that is possible. In that case, one could consider a marginal employment (mini job). The temporary wage reduces the profit for the GmbH. On the other hand, the managing director receives tax-free income. It should be clarified in advance with the employment office whether the payment of the temporary wage would have an impact on the start-up grant.

4. The start-up grant is tax-free and is not subject to the progression clause. The grant therefore has no impact on the amount of tax.

5. The fifth rule is already taken into account in the payroll. If the severance payment is the only taxable income for the entire year, no income tax will be charged (see points 1 and 2).

I hope this gives you an initial overview.

Best regards,

Wander
Tax advisor